Patrick Chovanec

I spoke last week on China IP at Columbia University. During my talk, I mentioned how common it is for the Chinese side in a licensing or a joint venture deal (or really any deal) to claim that the law requires the foreign company to transfer ownership of IP for the deal to go through. I talked of how when my law firm is confronted with such a situation we ask the Chinese side to provide us with the legal cite to the law that allegedly requires this. To which we typically get one of the following in response:

An English language translation of a law that does not exist;

A Chinese language version that does not say what the Chinese side says it says;

A claim by the Chinese side that it is an unwritten law.

I then stressed how there is no such law, though we have on more than one occasion seen American companies turn over their IP because they believed otherwise.

After my talk, Andrew Hupert told me of how on more than one occasion he has worked with American companies that have entered into exclusive distribution arrangements with Chinese companies based on the assertion by the Chinese company that Chinese law requires such agreements between foreign companies and Chinese companies grant the Chinese company exclusive distribution for all of China. Andrew described one situation where an American had signed a long-term China exclusivity deal with a Chinese company that had no capabilities outside Shanghai.

There is no such exclusivity requirement!

In fact, as commentators love to point out, (see for example, Patrick Chovanac’s Nine Nations of China), China is a very large and very diverse place and a really good distributor/marketer/seller of a product or service in one region might very well not know anything about distributing/marketing/selling in another region. The good news though is that you are not required to use the same distributor throughout China, no matter what you are told.

We have found this exclusivity claim particularly common with wine and with food products where the Chinese party claims that the approval to sell these items in China is restricted to only one seller/distributor. There are though some product areas (such as pharmaceuticals) where it is very common for a distributor/reseller to require nationwide distribution even though it is not legally required.

Bottom Line: Chinese companies love claiming something has to be done a particular way in China whether that is really the case is not. This holds true with respect to the law as well. Your job is to confirm or deny.

For more on distribution agreements in China, check out the following:

A while back Patrick Chovanec did a post on China’s second tier cities, entitled, “China Radio: China’s Nine Nations and 2nd-Tier Cities.” In that post he discussed his radio interview in which he had talked about how companies like Retailers like Wal-mart, Carrefour, Pizza Hut and KFC have been “among the most aggressive in reaching” beyond China’s first tier cities.
Chovanec then writes very briefly on how what “really distinguishes 1st, 2nd, and 3rd-tier cities is the ability to attract international business and investment.” He then notes that China has many cities with more than a million inhabitants, including some provincial capitals, that “would not qualify as 2nd-tier cities.” Chovanec goes on to write about what distinguishes the second tier cities that have been best at puling in foreign investment from those cities that have not fared so well in that department:

It’s important to keep in mind the distinction between hard infrastructure — highways, airports, railroads — which many 2nd-tier cities have built, and the “soft” infrastructure — like foreign schools and hospitals — necessary to attract global executives and their families.
There’s a danger that officials in many 2nd-tier cities are simply trying to replicate the development path of 1st-tier cities like Beijing, Shanghai, and Shenzhen. What they need to be thinking about is how their city or region can carve out a unique niche in China’s national economy. Some cities that have started to think successfully along these lines include Dalian, Chongqing, and Hangzhou (as well as Nanning in SW China).

He is absolutely right. There are definitely some second tier cities in China that make it relatively easy for foreigners both because of their hard and their soft infrastructures and because of local governments that are open to and welcoming foreign business and there are others that are not. A list of the ten second tier cities where my law firm has done the most business (all of this having been driven by our clients), would consist of the following:

Chengdu

Chongqing

Dalian

Hangzhou

Nanjing

Qingdao

Tianjin

Wuhan

Xi’an

Xiamen

Are these the top ten second tier cities for foreign business? I think it probably is.
What do you think?
UPDATE: Mea culpa. I cannot even believe I left off Suzhou, which error I realized upon seeing the first comment. We get a ton of work involving Suzhou and I think the only reason I left it off is because I barely even think of it as a second tier city. One of the reasons I barely think of it as a second tier city is because it tends to have minimum capital requirements for WFOEs more in line with Beijing and Shanghai than with Qingdao or Xi’an.

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About China Law Blog

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.